Britain came a step closer to losing its top credit grade at Fitch Ratings after Chancellor of the Exchequer George Osborne said debt will rise more than previously forecast.
The U.K. was placed on rating watch negative, “indicating a heightened probability of a downgrade in the near term,” Fitch said in a statement in London today. The company will complete its review of the grade by the end of April.
“The persistently weak performance of U.K. growth, in part due to European growth, has increased uncertainty around the U.K.’s potential output and longer-term trend rate of growth with significant implications for public finances,” the ratings company said.
The move comes two days after Osborne’s annual budget, when he reduced his growth forecast and said it will take longer than previously expected to lower Britain’s debt. Moody’s Investors Service took Britain’s rating down to Aa1 from Aaa on Feb. 22, citing the economic outlook and challenges to the fiscal program. Investors often ignore such moves, evidenced by a drop in gilt yields since that downgrade.
“It’s hard to conclude that Fitch won’t now move to a downgrade,” said David Tinsley, an economist at BNP Paribas SA in London. “The uncertainty over both near and long-term U.K. growth is high.”
He added the bigger issue “will arguably be whether they keep the negative outlook on the U.K. after the downgrade.”
The pound pared its advance against the dollar after the Fitch statement. It was trading at $1.5173 as of 5:53 p.m. in London, up 0.3 percent from yesterday.
The independent Office for Budget Responsibility cut its 2013 growth projection to 0.6 percent from 1.2 percent, Osborne told Parliament in his March 20 budget speech. Over the five fiscal years starting in April, the deficit will total 434 billion pounds ($660 billion), 55.7 billion pounds higher than forecast in December.
The OBR also expects net debt to begin falling in 2017-18, a year later than previously planned. It’s the second time the debt target has slipped. Net debt will peak at 85.6 percent of gross domestic product in 2016-17. The OBR previously put the peak at 79.9 percent of GDP in 2015-16.
Osborne first pushed back his timeframe for cutting debt in December. Fitch said at the time that missing the target “weakens the credibility of the U.K.’s fiscal framework.”
Investors often disregard changes in ratings. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December.
Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by Standard and Poor’s. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.
The U.K. economy shrank 0.3 percent in the fourth quarter of 2012, and Osborne said in his budget statement that renewed turmoil in the euro area may damage recovery prospects.
“I will be straight with the country: another bout of economic storms in the euro zone would hit Britain’s economic fortunes hard again,” he said.
S&P put the U.K.’s rating on a negative outlook in December and said on March 20 it was examining the details of the latest budget.
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